COVID-19: Government guidance on transitioning back to normal on public contracts

As a result of the COVID-19 pandemic the supply of goods or services to public bodies under existing contracts has in certain cases needed to be reduced, interrupted or adjusted due to, for example, supply chain issues, a drop in demand or incapacity to fulfil the contract due to UK government restrictions in place. As the UK government turns towards its recovery strategy, we look at: how public bodies might deal with risks to continuity of supply of critical services, and begin the transition towards new, sustainable, operating models; and how this might impact suppliers.

As discussed in our previous public procurement briefing, the UK Cabinet Office issued guidance for public bodies (or "contracting authorities") in March 2020 regarding relief that could be granted to suppliers (e.g. continued payment in the absence of supply, or variations to contract requirements) to ensure service continuity during and after the COVID-19 pandemic (the "Supplier Payment Guidance").

The UK Cabinet Office has since published a further policy note which updates and builds on the Supplier Payment Guidance (the "Recovery and Transition Guidance"). Taking effect from 1 July 2020, the new guidance focuses on the steps contracting authorities should take vis-à-vis their suppliers with a view to exiting any supplier relief arrangements put in place to ensure service continuity and managing the transition to new longer-term operating models. The Recovery and Transition Guidance is not intended to replace the Supplier Payment Guidance, and contracting authorities should continue to follow the Supplier Payment Guidance where appropriate.

Key points from both sets of guidance (the "Guidance") are summarised below.

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Supplier relief

The Supplier Payment Guidance advises that contracting authorities should continue to pay 'at risk' suppliers (to be defined by the contracting authority) as quickly as possible to maintain cash flow, preserve supply chains, protect jobs and ensure business continuity when supply can resume. The Recovery and Transition Guidance acknowledges that it may still be appropriate to provide such contractual relief measures (or even apply new relief measures) to secure continuity of supply for critical services.

This could entail accelerating payment to suppliers sooner than the 30 day limit set out in the Public Contracts Regulations 2015 ("PCRs"), paying disputed invoices (with a view to reconciling later), prioritising high value invoices where suppliers are reliant on a supply chain, or asking suppliers to invoice more frequently (e.g. weekly rather than monthly).

Changes to payment terms could also be made, such as payment against revised/extended milestones or timescales, interim payments, or payment in advance. The rules prohibiting advance payments without Treasury approval have been temporarily adjusted during this period, but the Recovery and Transition Guidance notes that the risks associated with advance payment should be carefully considered and documented. The Recovery and Transition Guidance also suggests that payment in advance of need should be considered alongside other forms of relief such as relief on KPIs and service credits. For contracts such as concession contracts other forms of commercial solutions may be appropriate.

While these measures would be welcome for many suppliers, the government has emphasised that relief payments are not intended to be an economic response to the COVID-19 pandemic and suppliers are not automatically entitled to the relief measures described in the Guidance. In addition, suppliers must not be in receipt of multiple, duplicative relief under the Guidance and the Coronavirus Job Retention Scheme ("CJRS"). This means, if suppliers are in receipt of relief payments, they should have ensured that all parts of the workforce identified to deliver the contract were not furloughed during this period. However, it is permissible for a supplier to receive partial payments for non-labour related costs and claim labour costs under the CJRS.

Transparency

It remains the case that suppliers should continue to act transparently with public bodies.

In particular, suppliers receiving public funds through supplier relief measures must agree to operate on an ‘open book’ basis. This means that suppliers must make available to the contracting authority any financial data as may be required to demonstrate payments received have been used in the manner intended – e.g. that staff and supply chains have been paid in a timely manner. It also emphasises that suppliers should not expect to make profits on elements of a contract that are undelivered during this period, and that all suppliers are expected to operate with transparency and integrity.

To this end, the Recovery and Transition Guidance notes the need for record keeping by both contracting authorities and suppliers. With an eye to the risks of potential insolvency of suppliers, contracting authorities should in particular be careful to keep a comprehensive record of all decisions, the reasons behind key decisions and actions taken. Proper record keeping of this kind will support transparency and future scrutiny of taxpayer value for money.

Transition planning

Where relief is being provided, suppliers should expect public bodies to plan for transition back to normal service in the next few months.

The Recovery and Transition Guidance advises that contracting authorities should begin to review their contract portfolio to determine whether it is still appropriate to provide any supplier relief measures they may have put in place, and work with suppliers in receipt of such relief to develop transition plans, which should be implemented as soon as possible and in any event before the end of October 2020.

The Recovery and Transition Guidance notes that transition plans should be agreed by both parties and include the following:

A planned exit date for when any supplier relief will end;
In cases where advanced payments have been made, if and when any outstanding goods or services are to be delivered;
An assessment of any costs associated with implementing Public Health England guidance, specifically in relation to delivering the public contract; and
An assessment as to whether the contract is still operationally relevant and viable as a result of COVID-19 and, if not, proposals for variation or termination (see Section 4 below).

Contracting authorities and suppliers will need to work in partnership, openly and pragmatically to agree deliverable transition plans. The UK Government updated the Outsourcing Playbook in June 2020 which provides further information as regards how to engage constructively with suppliers.

Contracts that are no longer relevant or viable

Some contracts may no longer be relevant or viable after the events of recent months.

Where contracts are no longer relevant or viable, the Recovery and Transition Guidance states that the contracting authority and supplier should explore the possibility of varying the contract in question. This builds on the advice in the Supplier Payment Guidance that, wherever possible, contracting authorities should seek to re-deploy the capacity of suppliers to other areas of need or otherwise make changes to contract requirements, with a view to avoiding complete suspension of performance under the contract (e.g. as a result of triggering a force majeure clause).

These changes to contract requirements or payment terms can be made on the basis of the provisions set out in Regulation 72 PCRs. Any changes should be documented as being specific to the COVID-19 pandemic, and should be time limited or subject to a review mechanism, with the contracting authority having the power to decide when normal supply should resume. We discuss extending or modifying existing public contracts in our briefing here.

The Recovery and Transition Guidance recognises however that in some instances contracts may no longer be viable and it may be necessary to terminate. In these circumstances, contracting authority and suppliers should work together to pursue termination based on the existing contractual remedies.

What does this mean for suppliers and public bodies?

In summary, while public bodies and suppliers can expect that relief measures put in place in the last few months may be able to continue in the short term, there is a clear expectation within government that any such continuation should be justifiable, time limited, and subject to clear plans for a transition back to normal.

Where suppliers are not proactively contacted by public bodies in respect of relief measures, they may wish to consider themselves:

the importance to their business of cash flow derived from public contracts;
the underlying justifications for prompt payment or other support;
how much longer interim relief might be needed for; and
whether the pandemic has materially changed the nature or need for the services they are providing to public bodies.

Suppliers facing termination by a contracting authority may wish to explore whether the guidance offers any assistance in challenging the decision to terminate (e.g. on the basis that the contracting authority has not properly taken account of the guidance and should have erred in favour of maintaining the contract). More widely, particularly where termination could be said to lead to a harsh and arguably unjust outcome for the supplier, it may be worth exploring whether recent Cabinet Office guidance, which we discussed here is of any assistance, together with some of the principles recently outlined by two former Supreme Court judges in relation to COVID-19 contractual disputes, which we discussed here.